Midcareer: In Your Mid-30s Through 40s
Assess and maximize your retirement savings.
By Taylor Mallory
Now that you’ve established yourself in the workplace, you may be starting a family or building the home of your dreams. You now have the resources to live the life you’ve planned for yourself – and to create a solid foundation for your financial future.
If you already have a healthy savings account, an employer-sponsored retirement plan and your own IRA, pat yourself on the back for your wise planning. If you, like many women, spent your 20s accumulating an enviable professional wardrobe rather than retirement savings, you’ve still got time – if you start now. Whether you’ve just started planning or are ready to be proactive about your future, the keys to financial stability are to start now and stay committed.
Here are the key things to consider as you buckle down on saving:
1. Let a professional help – and have frequent financial checkups. PINK has heard it time and time again – from the top execs and entrepreneurs who fill our pages to those who speak at our conferences: If you aren’t a financial expert, consider hiring one. A financial adviser or money manager can suggest an investment program tailor-made for you.
2. Keep growing your savings. Thanks to the power of compounding, investing even a little at a time can make a big difference. You can collect interest on money you’ve contributed and what you’ve earned on that investment.
If you change jobs, don’t cash out your employer-sponsored retirement plan; keep the money (penalty-free) working for you by consolidating it into a traditional IRA. Or, when allowed, roll it into the 401(k) plan at your new job.
If possible, increase your contributions, especially if you have an employer-sponsored retirement plan in which the company will match your investment. Don’t pass up the free money! See “Retirement Roadmap: Just Starting Out” for investment options.
3. Diversify your investments. Almost 92 percent of your investment returns depend on how your assets are allocated among the different investment options (i.e., stocks, bonds, mutual funds), while only about 2 percent is due to the value of actual stocks and bonds, according to a Brinson, Singer and Beebower study. Asset allocation/diversification doesn’t eliminate the risk of fluctuating prices and uncertain returns, so how best to allocate your money depends on your age, financial goals and how long you have to meet them, risk tolerance and current financial position. A financial adviser or money manager can tailor your portfolio to meet your qualifications.
4. Take advantage of tax deferral. Because “regular” investments are taxed whenever they pay out earnings and again on profits when you sell, taxation can reduce the long-term earning power of your investments. But tax-advantaged accounts such as a 401(k), IRA, and annuities are specifically designed for long-term retirement planning, deferring taxes in exchange for restrictions on early withdrawals. Retirement plans and IRAs have contribution limits, while individual annuities are generally not limited in the amount you can contribute each year.
Short-term needs can often hamper long-term investment goals. Here are some common mistakes:
Using debt as an excuse not to save. Pay yourself first. Paying off higher-interest debt is certainly an important financial consideration before investing, but neglecting savings to focus on debt is counterintuitive. Between student loans, mortgages and educational expenses for children, you may never be completely free from debt. A financial adviser can help you balance investing in your future while paying for your past.
Borrowing money from your retirement fund or 401(k). While borrowing money from yourself may sound appealing, consider these points before you take out that loan:
• If you leave the company through which you took out the loan before you fully repay it, you may be required to pay the balance or pay taxes on it. If you do not pay off the loan and are under age 59 ½, the IRS may charge a 10 percent early-withdrawal penalty.
• You’ll miss out on potential returns if the loan’s interest rate is lower than the return on the investment would be.
• Your company may charge fees for retirement plan loans.
• Some companies set deadlines for applying for loans and may take an extended period of time to process the application, so the penalty-ridden loan may come too late to fit your needs. Consider this only as a last resort.
Making an early withdrawal from your IRA. You can make withdrawals from your traditional IRA before age 59 ½ without a tax penalty if:
• You become disabled.
• Your medical expenses exceed 7.5 percent of your adjusted gross income.
• You’re purchasing your first home (limited to $10,000).
• You want to pay education expenses for yourself or your immediate family.
• You withdraw money in the form of qualified periodic withdrawals.
For Roth IRAs, you can withdraw previously madecontributions tax-free and penalty-free for any reason and at any time. Earnings can be withdrawn after five years(begins with the tax year the first contribution is made) and before 59 1/2 with no penalty if:
• You become disabled.
• You’re purchasing a first home (limited to $10,000).
Insurance: Preserving Your Assets
By this time in your career, hopefully you’ve accrued many assets that you don’t want to lose. While continuing to invest your way towards a wealthy retirement, don’t forget to protect what you’ve already earned – and prepare for possible roadblocks that might keep you from earning more.
A well-crafted – and fully utilized – insurance program includes:
• Life Insurance: The “traditional” approach to life insurance focuses on the insured’s heirs, but your financial adviser may apply certain provisions of some life insurance policies (loans, transferability) as part of a larger investment strategy.
• Long-Term Disability: Injuries or illnesses happen, even to those in perfect health. This insurance minimizes the financial damage should the worst happen.
• Health Insurance: Because fewer employers are offering health insurance to retirees than ever before, consider a personal health insurance policy to supplement Medicare after retirement.
• Long-Term Health Care: Have you made preparations in case you – or loved ones – require long-term medical care or nursing home expenses? Among other benefits, long-term care policies can protect retirement funds from the impact of long-term health expenses. Most people don’t investigate this option until it’s too late. Consider this before you need it. It’s much cheaper to purchase in your 50s than in your 60s.
• Other Insurance: Most people understand the importance of protecting homes, automobiles and other personal property. But you may also want to look into liability insurance to protect your business, investments and earning power.
• Annuities: An increasingly popular retirement income alternative, annuities help provide for heirs, protect savings through optional features and help accumulate long-term savings on a tax-deferred basis. Earnings aren’t subject to current income taxes unless you take withdrawals, so money compounds faster than in a similar, taxable investment. Make sure to check the financial rating and stability of any company from which you purchase annuities.
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